Commissioner of Income Tax, Thiruvananthapuram v. Network Systems and Technologies P. Ltd.

**IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT:-** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 6TH DAY OF DECEMBER 2017/15TH AGRAHAYANA, 1939** **I.T.A.No.113 of 2015** **--------------------------** **AGAINST THE ORDER/JUDGMENT IN ITA 277/COCH/2014 DATED 14-08-2014 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN ASSESSMENT YEAR 2007-08 ---------------------------** **APPELLANT(S)/ RESPONDENT:--------------------------** **THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM** **BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, GOI (TAXES)** **RESPONDENT(S)/APPELLANT:-------------------------** **M/S.NETWORK SYSTEMS AND TECHNOLOGIES P. LTD., THIRUVANANTHAPURAM.** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06-12-2017, ALONG WITH I.T.A.NO.258 OF 2015, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:-** ## **I.T.A.NO.113 OF 2015** ## **APPENDIX** ## **APPELLANT'S ANNEXURES:------------------------** |**ANNEXURE-A**|**TRUE COPY OF THE ORDER UN/S.143(3) OF THE**| |---|---| ||**INCOME TAX ACT, 1961 OF THE ASSESSING OFFICER**| ||**DATED 28.12.2010.**| |**ANNEXURE-B**|**TRUE COPY OF THE ORDER OF THE COMMISSIONER OF**| ||**INCOME TAX (APPEALS) DATED 20.02.2014.**| |**ANNEXURE-C**|**TRUE COPY OF THE ORDER OF THE APPELLATE TRIBUNAL,**| ||**DATED 14.08.2014.**| |**ANNEXURE-D**|**I.T.A.T. ORDER REPORTED IN SKYLINE (24SOT) 402.**| |**ANNEXURE-E**|**I.T.A.T. ORDER REPORTED IN EXTEMPOREE**| ||**(116 TTJ 525).**| |**RESPONDENT'S ANNEXURES:-**||| |---|---|---| |**------------------------**||**NIL.**| |**VKU/-**|**[**|**TRUE COPY ]**| ## K. Vinod Chandran & Ashok Menon, JJ. ------------------------------------------------------I.T.A.Nos.113 of 2015 & 258 of 2015 ------------------------------------------------------Dated, this the 06[th] day of December, 2017 ## **JUDGMENT** ## Vinod Chandran, J: The Revenue is in appeal against the orders passed by the Tribunal, wherein the issue dealt with was identical and falls on an interpretation of Section 2(22)(e) of the Income Tax Act, 1961 [for brevity “the Act”], which is extracted hereunder: - “2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31[st] day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits”. ITA Nos.113 & - 2 - 285 of 2015 The above provision seeks to take in any amounts, paid to an individual shareholder who is also a beneficial shareholder, or any concern in which he is substantially interested, but not termed as dividend merely to absolve the shareholder from the liability to tax. It seeks to avoid any measure employed for distribution of profits of a Company, other than by way of dividend, by way of loans or advances, directly to the shareholder or to any concern in which he is substantially interested or on his behalf; so as to exempt the dividend from being taxed, at the hands of the individual shareholder. 2. The assessment year in both appeals are 2007-08. Brief reference to facts is required, which are as follows: In I.T.A.No.258 of 2015, one John George Nechupadom had share holding of more than 10% in M/s.Plant Lipids Pvt. Ltd. M/s.Plant Lipids Pvt. Ltd. advanced an amount of Rs.1,33,66,089/- to one M/s.Aromatic Ingredients Pvt. Ltd. The allegation was that John George Nechupadom had substantial interest in M/s.Aromatic Ingredients Pvt. Ltd., which is the assessee at whose hands the amounts were taxed as dividend, relying on the fiction under ITA Nos.113 & - 3 - 285 of 2015 Section 2(22)(e) of the Act. In I.T.A.No.113 of 2015, the Chairman of one M/s.Network Systems & Technologies P. Ltd. had more than 10% share holding in M/s.Sunfibre Optics Pvt. Ltd., the latter of whom advanced an amount of Rs.1,93,33,974/- to the assessee-Company. The Assessing Officer rejected the contention of both the assessees that there could be no taxation of the said amounts deeming it to be a dividend at the hands of the assessee, since the assessee is not the shareholder of the other Company. 3. The dividend could be taxed only in the hands of the shareholder, was the contention raised; which was rejected by the Assessing Officer. On appeal, the same was reversed finding favour with the contention raised by the assessee. The Tribunal also confirmed the finding in the two separate appeals by the Revenue. In I.T.A.No.258 of 2015, there was also a finding that John George Nechupadom did not have any substantial interest at the time of advancing the amounts. The Revenue relies on the decision of a Division Bench of the High Court of Delhi, produced as Annexure-D, reported in _**Commissioner of Income-tax v.**_ ITA Nos.113 & - 4 - 285 of 2015 ## _**National Travel Services**_ **[(2011) 202 Taxman 327 (Delhi)] = [(2012) 347 ITR 305 (Delhi)].** 4. The learned Senior Counsel appearing for the respondent, however, would distinguish the aforesaid judgment with another Division Bench judgment of the same High Court in **I.T.A.No.462 of 2009** and connected matters dated 11.05.2011 _**[Commissioner of Income Tax v. Ankitech Pvt. Ltd.].**_ In _**Ankitech Pvt. Ltd.**_ , the learned Judges had considered the impact of the deeming provision under Section 2(22)(e) and found that it takes in three situations wherein a payment by a Company in which public are not substantially interested, could be deemed to be a payment of dividend. The three situations are, when an advance or loan is made to (i) a shareholder, who is also the beneficial owner of shares, having more than 10% of the voting power or (ii) any concern in which such shareholder is a member or a partner and in which he has a substantial interest and (iii) any payment by the Company on behalf, or for the individual benefit, of such shareholder. The amounts so paid being deemed to be a dividend, could be taxed only at the hands of the shareholder was ITA Nos.113 & - 5 - 285 of 2015 the specific finding in _**Ankitech Pvt. Ltd.**_ 5. _**Ankitech Pvt. Ltd.**_ and _**National Travel Services**_ were authored by the same learned Judge [as His Lordship then was]. In _**National Travel Services**_ a different situation was considered insofar as the concern in which the shareholder had substantial interest was a partnership firm. The partnership firm was assessed and the objection taken was that the shares were purchased in the name of the partners and hence the firm, though the beneficial owner, was not the shareholder. Assessment could be made, according to the assessee under Section 2(22)(e) only if the shareholder was also the beneficial owner of shares. The Court held that a partnership having no independent existence as distinguished from its partners, the shares could be purchased in the name of the firm and the firm would be the beneficial owner; thus frustrating the very object of the provision in the case of partnerships. Relying on _**K.P. Varghese Vs. ITO [1981]**_ **131 ITR 597** it was held that _“where the plain literal interpretation of a statutory provision produces manifestly absurd and unjust results which could never have been intended by the Legislature, the_ ITA Nos.113 & - 6 - 285 of 2015 _Court must modify the language used by the Legislature or even do violence to it, so as to achieve obvious intention of the Legislature.” (sic:para 20)._ On that reasoning and the resultant interpretation, it was found that the amounts deemed to be dividend, taxed at the hands of the partnership firm was perfectly in order. 6. _**Ankitech Pvt. Ltd.**_ stands on a different footing, which is squarely applicable to the assessee's herein, who are Private Limited Companies. The decision in _**Ankitech Pvt. Ltd.**_ has been upheld by the Hon'ble Supreme Court in Civil Appeal No.3961 of 2013, in the following manner: “The impugned judgment and order dated 11.05.2011 has relied upon a judgment of the same date by a Division Bench of the High Court of Delhi in ITA No.462 of 2009. Having perused the judgment and having heard arguments, we are of the view that the judgment is a detailed judgment going into Section 2(22)(e) of the Income Tax Act which arises at the correct construction of the said Section. We do not wish to add anything to the judgment except to say that we agree therewith. These appeals are disposed of accordingly”. ITA Nos.113 & - 7 - 285 of 2015 Respectfully following the decision of the High Court of Delhi as affirmed by the Hon'ble Supreme Court, the Income Tax Appeals are rejected, answering the question in favour of the assessee and against the Revenue. There shall be no order as to costs. Sd/K.Vinod Chandran Judge Sd/Ashok Menon Judge vku/- [ true copy ] CONTINUED AT PAGE NO.-8 - ITA Nos.113 & - 8 - 285 of 2015 The I.T.A number shown as “285 of 2015” occurring on the top of pages 2 to 7 of the common judgment dated 06.12.2017 in I.T.A.Nos.113/2015 and 258/2015 is suo motu corrected and substituted as “258 of 2015” as per order dated 25/01/2018 in I.T.A Nos.113/2015 and 258/2015. Sd/Registrar (Judicial) [ true copy ]